For better or worse, Elon Musk has taken a liking to old Milton Friedman videos. On the good side, Musk has embraced Friedman’s distrust of government and money printing. Friedman, however, was no Rothbard regarding the consistent application of ethical and economic principles to the actions of the state. Despite Friedman’s compromises and error-ridden macroeconomic theorizing, there’s no denying that he was a great popularizer and eloquent defender of laissez-faire.
On the bad side, Musk has now embraced monetarist-inspired inanities like, “Money is simply an abstract representation of real things.”
The post was attached to a video of Musk reflecting on the nature of money:
People get confused. They sometimes think an economy is money. But money is the database for the exchange of goods and services, and/or time-shifting the exchange of goods and services. Money is a database. Money is not a power in and of itself. You can run a thought experiment where you are shipwrecked on an island and you’ve got a trillion dollars in a Swiss bank account. It’s worthless. You’d rather have a can of soup. You could have all the bitcoin in the world, and you’re still going to starve. The actual economy is goods and services.
The most sense I can get out of Musk’s claim that “money is a database” is that he means that money merely refers to real goods and services, in the same way an entry in a library’s database might note the location of and other identifying information about a particular physical book. Musk’s point is that the database entry is not the book. The database entry helps you obtain the book. Bringing the analogy back to money, money only helps us get items in the market.
Now, this analogy does work when you are making the simple (but important!) argument that more money does not increase the stock of consumer goods or factors of production. For example, creating more library database entries does not magically create more books. But that’s as far as the analogy goes. It breaks down as soon as you consider why people demand money, the formation of money prices, and the full effects of changes in the money relation.
Why People Demand Money
Money is an “element of change” because people hold it and accept it as payment in view of an uncertain future. As Mises explained,
Money is neither an abstract numéraire nor a standard of value or prices. It is necessarily an economic good and as such it is valued and appraised on its own merits, i.e., the services which a man expects from holding cash. On the market there is always change and movement. Only because there are fluctuations is there money. Money is an element of change not because it “circulates,” but because it is kept in cash holdings. Only because people expect changes about the kind and extent of which they have no certain knowledge whatsoever, do they keep money.
The only reason to hold money is because you don’t know the future perfectly. If you knew the future perfectly, you would hold interest-earning assets that mature as soon as you know you will be ready to purchase something.
Thus, money is not “an abstract representation of real things” or a database. It is an economic good that we value for the unique services that money offers. Holding money removes the uncertainty associated with future exchanges—we don’t know what or when we will buy in the future, nor the exact prices of things we will purchase in the future, so we hold cash.
This insight matters because if you don’t understand why people hold money, you start to slip into the thinking that cash balances are “idle,” or held for no good reason, and ought to be plundered by the state or stimulated into circulation for the sake of kickstarting the velocity of money or aggregate demand.
The Formation of Money Prices
Since money is an economic good, we rank it against other goods and services on our value scales. For example, someone (we’ll call him Ksum Nole) who purchases a 2025 Tesla Model S may have a preference ranking like this:
Ksum Nole
$79,990.01
(2025 Tesla Model S)
$79,990.00
That is, Ksum Nole would pay as much as $79,990.00, but not a cent more. Fortuitously, Elon Musk is willing to accept $79,990.00 but not a cent less. They can trade!
Elon Musk
($79,990.00)
2025 Tesla Model S
($79,989.99)
The price that emerged in this mutually beneficial exchange was the result of a reverse valuation between the traders regarding the money and the car. The money was not a standard of measurement. If it were, then no exchange could take place. There would be agreement regarding the “equality of value” regarding the car and the $79,990, like two people agreeing that a piece of lumber is eight feet long.
Nor were the realized price, the buyer, and the moment of the exchange pre-recorded in some incorporeal “database of destiny” that made this exchange inevitable. The exchange happened because two potential traders found each other and realized they could exchange property for mutual benefit.
Also, the money was not an “abstract representation” of the 2025 Tesla Model S while it was in Ksum Nole’s cash balance before the exchange. The money was providing monetary services to Ksum before the exchange, just like the inventory was providing inventory services to Elon before the exchange. We can only associate the money with the purchased car after the exchange took place, because values are only made evident in action. Even so, it must be remembered that there was no equality of value.
Thus, money is a good. The only way for exchange ratios to emerge is for two individuals to agree that each would prefer to have the other’s property instead of what each currently owns. The fact that virtually all transactions feature money as the property offered by one party does not change its nature as an economic good.
The Full Effects of Changes in the Money Relation
Musk seems to think that the government shouldn’t manipulate money. On that we agree, but it’s not because we’d get a faulty money database, whatever that could mean.
When the government prints money, additional units of this unique good enter the cash balances of certain individuals, including those in the government. The marginal utility of each money unit is now lower for these people, meaning they can now outbid other buyers for certain goods and services. For example, consider another individual, named Gov, whose preference rankings before and after an influx of cash look like this:
Gov (before receiving $10,000)
$77,990.01
(2025 Tesla Model S)
$77,990.00
Gov (after receiving $10,000)
$87,990.01
(2025 Tesla Model S)
$87,990.00
Before the influx, Gov would only pay as much as $77,990. After the influx, Gov can outbid Ksum for the same car. Supposing that Elon is an excellent businessman, he sells the car for Gov’s maximum willingness to pay: $87,990. (I’ve simplified this. Gov would likely outbid other buyers in a variety of markets, not just the Tesla market. In that case, Gov’s new maximum willingness to pay wouldn’t be as much as $10,000 more.)
The story doesn’t end there, because now Elon has more units of money than he would have had, absent the money printing. Elon can now outbid other buyers for other goods, and then those sellers can do the same. This is how price inflation works: the first receivers increase their demands for goods and services, outbidding those who would have purchased the goods; then, the subsequent receivers do the same. Prices rise as individuals receive the money, reorder their preferences in light of this newfound purchasing power, and then outbid other demanders. This simple inflation process continues until nobody’s increased cash balance is sufficient to outbid others, due in part to the fact that many prices were already bid up by others.
The full effects of money printing, therefore, include what Mises called a “price revolution,” not a proportionate and immediate change in the price level. There is no such thing as “the price level” anyways. We each face a different array of prices, and these prices are determined by the total demand for the good (which may be influenced by money printing) and the total stock of the good.
The full effects of money printing include the redistribution of goods and services toward those closest to the money spigot. It includes entrepreneurs’ changed production plans as a result of new money pouring into the economy through credit markets. You cannot see and understand these effects if you hold that money is a “database” or “an abstract representation of real things.”
There is no independent mechanism by which money exerts some general power on all prices. Money’s “driving force” is effected by the buying and selling decisions of market participants, who rank units of money as a good against non-monetary goods and services. As Mises explained:
While money can be thought of only in a changing economy, it is in itself an element of further changes. Every change in the economic data sets it in motion and makes it the driving force of new changes. Every shift in the mutual relation of the exchange ratios between the various nonmonetary goods not only brings about changes in production and in what is popularly called distribution, but also provokes changes in the money relation and thus further changes. Nothing can happen in the orbit of vendible goods without affecting the orbit of money, and all that happens in the orbit of money affects the orbit of commodities.
The notion of a neutral money is no less contradictory than that of a money of stable purchasing power. Money without a driving force of its own would not, as people assume, be a perfect money; it would not be money at all.
What about Musk’s example of the shipwrecked individual?
Musk’s example involving the shipwrecked individual does not help him make the case that money is a database. It’s a red herring. The reason Robinson Crusoe does not need money is because he has no one to trade with. Money (qua money) provides no services to economically isolated individuals because there are no other individuals who demand money for its services.
Money is unique because it is used as a medium of exchange. Unlike other goods, money is not demanded so that it can be destroyed in consumption or used up in production. It is demanded because others demand it. This, however, does not mean that it is some ephemeral and independent thing outside the real economy.
